Dear [DEAR],

Attached is the final December 2011 result for the Thai Focused Equity Fund (TFE).  For the month, the Fund lost 1.7%, while the SET index increased 0.9% in US$ terms.  For the year, the Fund decreased 27.3% versus a 5.5% loss for the SET.

Below is a breakdown of our relative performance by key sector:

Our fund ended down and underperformed the market for the month, due to significant losses in the petrochemical and property sectors, where operational results were impacted by economic concerns in Europe and China, and severe flood impact (on property sector). 

Global equity markets moved in the wide range in December. Most markets, except the US markets, moved up during the second week of trading due to a positive expectation of additional austerity measures in Europe. However, equity markets gave back the gains in the third week of trading after the hope of another big solution in Europe appeared to be fading. Standard & Poor’s put 15 EU nations on negative credit watch and Fitch downgraded seven global banks based in Europe and US. At month end, the US markets on average were up 1.1% supported by stronger-than-expected reports on the US economy (retail sales, housing starts, and employment), while European ended down 2.2% and Asian markets closed flat on average for the month.

The Thai stock market was the seventh best performer among its peers, up 0.8% against a 0.1% loss in the region in December. For the year, the SET index was the fourth best performer, down 5.5% against a 14.3% loss in the region.   

Given the severe flood impact on major exporters’ production bases, Thai business leaders warned the government to announce a clear flood management plan by 1Q12. Most existing Japanese companies will continue operations in Thailand but it will become difficult to attract newcomers if there is no strong commitment from the Thai government on a flood protection plan. 

On the government side, the cabinet approved a THB350 billion fund for investment in water-resource management projects, including floodways, watergates, dams and designation of large water-holding areas known as “monkey cheeks” which will be implemented in 1-3 years. Meanwhile, the government allocated THB22.6 billion for short-term projects, including “monkey cheeks” in key locations and compensation for residents of flood plains, which will be implemented within the next five months (before the next rainy season in August). The government will also establish an insurance fund pool of THB50 billion to reassure foreign reinsurers. We expect to see big investment from both public and private sectors in flood control in 2012 onward.

On the other hand, the government continues its consumption stimulus plans via

1) raising monthly income of low-income bureaucrats and other state-employees holding bachelor’s degrees from THB8,000-10,000 to THB15,000 (up 50%-80%), starting January 2012. These pay increases will cover approximately 650,000 state employees. 

2) increasing the minimum wage for laborers in Greater Bangkok and Phuket to THB300 and 40% up in other provincial areas in April 2012.

These pay raises are aimed to help low-income earners to cope with their rising cost of living and to boost domestic consumption.

Meanwhile, the government will lower its corporate tax from 30% to 23% starting in 2012, and to 20% in 2013.  As a result, listed companies that pay the full 30% tax will have an additional profit increase of 10% this year from the tax cut.

Thailand’s exports in November, as expected, posted its second month of negative growth, due to the severe flooding, which we believe will have only a short-term impact. Exports decreased 13.1% y-o-y in November to US$15.3 billion.  Manufactured products fell 15.1% y-o-y but agricultural sales still increased 6.7% y-o-y.

The trade account balance showed a surplus of US$218 million, due to the higher increase in export value than import value. Imports decreased 1.9% y-o-y in November to US$15.1 billion, pressured by a 12.5% decrease in intermediate products and raw materials, a 2.8% increase in capital goods and a 6.4% decrease in fuel. 

The SET’s trading activity decreased 6.0% in December, from US$714 million to US$671 million of average daily volume. Foreigners were net sellers of US$381 million in December and are net sellers of US$126 million for the year. Retail investors are still bearish this month, with participation at 53%. Foreigners and domestic mutual funds accounted for the remaining 22% and 25% of volume, respectively.

If you would like to discuss our performance and/or strategy, please give Katekao or me a call at 662-255-2040.

Best regards,

Doug

_______________________________________________

Doug Barnett 

Quest Management Inc.

888/123 Ploenjit Rd, Bangkok, Thailand 10330

Tel:        +662-255-2040

Fax        +662-255-3050

Mobile:  +6686-784-3636

E-mail:  <doug@questthai.com>